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rorces ^Vhich iSdake 
Prices 

By 
WARREN F. HICKERNELL, Ph. D. 



Director, Bureau of Business Conditions, Alexander Hamilton 
Institute. Lecturer on "Panics and Depressions," School of Com- 
merce, Accounts and Finance, New York University. Formerly 
Mana^in^ Editor, Brookmire Economic Service. Author, "Business- 
Cycles," and numerous Articles on Finance. 




AMERICAN INSTITUTE OF FINANCE 
BOSTON 



OUR 
''COMPLETE EDUCATIONAL COURSE" 
IN THE SCIENCE OF 
MAKING MONEY MAKE MORE MONEY 

This list is arranged in the order of proper reading. The 
books are accompanied by a series of test questions, key prob- 
lems and analyses outlines, enabling the student to apply the 
knowledge acquired to immediate stock market and investment 
-conditions. 



L Developing Financial Skill 

2. Forces Which Make Prices 

3. Manipulation and Market 

Leadership 

4. Handling a Brokerage Ac- 

count 

5. Market Information 



IL Investment Securities 

12. Business Cycles 

13. Measuring and Forecasting 

General Business Condi- 
tions 

14. The Technical Position of the 

Market 

15. Money and Credit 



•6. The Essential Features of .^ -r, ■ -n £i 

^ . . -^16. Business Profits 

Securities 



7. The Value of a Railroad 

Security 

8. Industrial Securities 

9. Oil Securities 

10. Mining Securities 



17. Launching a New Enterprise 

18. Securing Capital for Estab- 

lished Enterprise 

19. Internal Financial Manage- 

ment 

20. Search for Bargains 



Copyright, 1922, by 
American Institute of Finance 



I 



V 
^ 
^ 



--i 






TABLE OF CONTENTS 



( 
'^ 

^ 

,^ Chapter I. Buying and Selling Zones Page 

;^ The Methods of a Seasoned Veteran 5 

Times to Buy and Times to Sell 6 

[v^ One-Way Pockets 7 

^ United States Steel 9 

I Crucible Steel 9 

''b Baldwin Locomotive 9 

Studebaker Corporation 10 

Westinghouse Electric 10 

N. Waves of Bullishness and Bearishness 10 

Amounts Bought and Sold 12 

Five Hundred Accounts in Steel Common 12 

Eyes to the Front 13 



Chapter II. Market Moves 

The Swing of Prices 15 

Three Types of Moves 15 

Dow's Law 17 

A Little Scene in the Broker's Office 18- 

Perspective 19" 

^ Chapter III. Price Moves from the Inside 

\^ Demand and Supply 21 

The Market Dynamic in Nature 21 

sy\ Board Room "Rust" 22 

J "The Big Interests Are Buying" 24 

V Surface Effects vs. Underlying Causes 24 

^ Cha{)ter IV. Twenty Years in the Slock Market 

•^^ Broad View of the Market 26 



V 




^ 



The Stock Market in Profile 26 

Cycle 1900-1903 28 

Stock Market Influences, 1900-1902 28 

Stock Market Influences, 1903 30 

Cycle 1904-1908 30 

Stock Market Influences, 1904, 1905, 1906 31 

Stock Market Influences, 1907 32 

Bull Market of 1908-1909 32 

Stock Market Influences, 1908-1909 33 



447462 



4 T able of C ontent s 

Chapter IV. Twenty Years in the Stock Market — continued p.^^,,, 

Reaction in 1910 33 

Stock Market Influences, 1910 34 

Irregularity 1911-1914 34 

Stock Market Influences, 1911 35 

Stock Market Influences, 1912-1914 36 

War Boom 37 

Stock Market Influences, 1915-1916 37 

America in the War 39 

Stock Market Influences, 1917-1919 39 

America after the War 40 

Stock Market Influences 1920-1922 41 

What Next We Consider 41 

Chapter V. From Gross to Dividends 

A Study in Corporation Finance .43 

Shares and Their Priority Claims 44 

Dividends vs. Earnings as a Market Guide 47 

Chapter VI. Looking Ahead 

The Sinews of Wall Street 51 

Questions Which Point the Right Way 51 

The Profit Maker's Point of View 52 

The Commercial and Financial Mainspring 53 

Jay Gould's Statement 54 

What's Ahead? 55 

The Next Step 57 

Questions 

Answers to Starred Questions 



CHAPTER I 

BUYING ZONES AND SELLING ZONES 

The thing to do is to watch Wall Street's eddies and cur- 
rents, exercise a little common sense, and in your speculations 
you ivill come out all right. 

— Jay Gould, Financier and Manipulator. 

The Methods of a Seasoned Veteran 

The attractive, but all too brief, advice given by Mr. Gould 
needs to be supplemented by the suggestions of another well- 
recognized authority in finance, Mr. Henry Clews, before the 
problem here set for solution is clearly mapped out. How 
secure profits in the market? Mr. Clews answers the question 
in this way: 

"The old veterans of the Street usually spend long intervals 
of repose at their comfortable homes, and in times of panics, 
which recur sometimes oftener than once a year, these old 
fellows will be seen in Wall Street, hobbling down on their 
canes to their brokers' offices. 

"There they always buy good stocks to the extent of their 
bank balances, which have been permitted to accumulate for 
just such an emergency. The panic usually rages until enough 
of these cash purchases of stock are made to aflord a big 'rake 
in.' When the panic has spent its force and the skies once 
more are bright, these old fellows, who have been resting ju- 
diciously on their oars in expectation of the inevitable event, 
which usually returns with the regularity of the seasons, quickly 
realize, deposit their profits with their bankers, or the surplus 
thereof after purchasing more real estate that is on an up grade, 
for permanent inv^estment, and retire for another season to the 



6 F r ce s 

quietude of their splendid homes and the bosoms of their happy 
famihes. 

"Those who follow this method always succeed," continues 
Mr. Clews. "If the venture is made at the right time — at the 
lucky moment, so to speak — and each successive venture is 
fortunate, as happens often to those who use their judgment in 
the best way, it is possible to realize a net gain of fifty per cent 
per annum on the aggregate of the year's investments." 



Times to Buy and Times to Sell 

The extent to which leading stocks upon the Exchange rise 
and fall in price each year will indicate, if we examine it, whether 



TABLE I 
Price Changes of Ten Leading Stocks 





1921 


1922 1923 


STOCKS 
















High 


Low 


Range 


High 1 Low 


Range; High 


Low Range 


American Can 


351^ 


23H 


12 


110 


32M 


77M 


107^ 


73K 341^ 


American Woolen . . . 


83 J.^ 


57 


ley^ 


111 


78M 


32 M 


109% 


65 U% 


Baldwin Locomotive 


100^^ 


6214 


38^ 


145 H 


93M 


51^ 


144^ 


UOK i^H 


Baltimore & Ohio. . . 


mi 


oQ% 


12 


60M 


33M 


26% 


60% 


403^ 205^ 


Corn Prod. Refining 


99M 


59 


40K 


134M 


91M 


43H 


160H 


114%! 463^ 


Studebaker 


93K 


43^ 


49K 


141M 


791^ 


62% 


126H 


93M| 32H 


The Texas Company 


48 


29 


19 


52^ 


42 


10,14 


^2% 


34% 1834 


Union Pacific 


131K 


HI 


20K 


1543^ 


125 


293^ 


144 J^ 


1243^ 20% 


U. S. Steel 


86 H 


70M 


16M 


nm 


82 


293^ 


1095^ 


851^ 243^ 


Woohvorth 


13934 


105 


U% 


223 


137 


86 


290 


1993^1 9Q-'i 


Average 


$72M |$27 $102 $45 | $112^ i$36i^ 


Fluctuation 


37%| 44%| 32% 



the opportunities to profit mentioned by Mr. Clews do actually 
exist. The accompanying table shows that during the three 
years examined, the ten prominent issues cited have fluctuated 
annually an average of more than $36 per share. This represents a 
change each year of from 32 to 44 per cent of the price of these 



Buying and Selling Zones 7 

stocks, a considerable range from low point to high point. Con- 
firming as it does the observ^ations of Air. Clews, this table shows 
that each year there are times to buy and times to sell. 

\'iewing the matter now from the standpoint of the specu- 
lative investor, and disregarding for the time being the trader 
and the investor, let us recall from Text I how the market 
undergoes from period to period changes in its price le\'cl. The 
distance from the market's low points, reached during panics 
and periods of depression, and its high points, touched when 
prosperity is general, let us divide roughly into four zones, the 
upper one in which prices are high, the bottom one in which 
prices are low, and the two others in which prices are mod- 
erate. When should you buy and sell? Lord Rothschild ex- 
pressed the matter tersely when, upon being asked how he 
had built up his fortune, he said: "Buy cheap and sell dear." 
This matter-of-fact rule let us apply to these four zones. The 
upper is the "sell" zone; the lower a "buy" zone; and the other 
two "remain neutral" zones. Here we have mapped out m 
broad outline, rules of operations which Mr. (lOuld, Mr. Clews, 
Lord Rothschild, and hundreds of other successful financiers 
for that matter, have proved effective. 

The realness of the zones, taken in connection with ihc table 
just cited and the figures presented in Chapter 1 1 : "Opportunity" 
in Text I, represents a condition laden with possibilities. What 
results? Faced as he is with these opportunities to profit, what 
does the average person do with them? 

One-Way Pockets 

The accounts of half a dozen men who traded actively from 
July 1, 1915 to February 29, 1916, have been studied by their 
broker who in revealing in his book, "One-Way Pockets." what 
he found, prefers to conceal his identity under the nom-de-plume 
of Don Guyon. So closely do the findings, based upon the 
purchases and sales made through his own brokerage office, tall\- 
with the results of other investigations and <)bser\ations that 
the facts now to be presented ha\e decided \alue. 



8 



F r c e s 



These traders, like a great majority of his firm's customers, 
had been bulHsh on the munitions and standard industrial 
stocks, and now that these stocks had enjoyed an advance of 
from 15 to 100 points each, followed by a reaction of less than 
forty per cent of this advance, the investigation could be expected 
to disclose substantial profits. 



POSSIBLE 
PROFITS 



U S 
STEEL 

31?8 



CRU- 
CIBLE 

SOTs 



BALD- 
WIN 
90'; 



STUDE- 
BAKER 

118^8 



u 



WESTING. 

HOUSE 

27'/s 



AVER- 
AGE 
0934 



ACTUAL 
LOSSES 



iVg, 



ovs 



iVfe 



3?8 



Figure 1: "One-Way Pockets" 

The results here pictured are based upon transactions of 46,600 shares, in five stocks 
actively dealt in. Note the very large possible profits, and what use these traders had actually 
made of them. 



The stocks selected for study — United States Steel, Crucible, 
Baldwin, Westinghouse, and Studebaker — had all been dealt in 
actively by each of the six traders, to the total extent of 46,600 
shares. The six accounts taken collectively, as though they 
represented the operations of one man, and their results sum- 
marized, this is the situation disclosed (see Figure 1). 



Buying and Selling Zones 9 

The following tables present with some detail the results 
summarized in Figure 1. They present the main features with 
respect to each of the five stocks and the actual price at which 
purchases and sales were made by the traders. 



United States Steel 

Opening price, July 1, 1915 595^ 

Low price for period 58^ 

High price for period 89 J-^ 

Total advance 315^ 

Closing price, Feb. 29, 1916 825^^ 

Net advance 23 

Customers' average buying price 81J^ 

Customers' average selling price 80^ 

Average loss, less commissions J^ 



Crucible Steel 

Opening price, July 1, 1915 31/^ 

Low price for period 29 

High price for period 109J^ 

Total advance 80J^ 

Closing price, Feb. 29, 1916 73i<C 

Net advance -tl ^ 

Customers' average buying price 855'^ 

Customers' average selling price 79?^ 

Average loss, less commissions 5^^ 



Baldwin Locomotive 

Opening price, July 1, 1915 64 ,'2 

Low price for period 64 

High price for period 154,V^ 

Total advance 90^^^ 

Closing price, Feb. 29, 1916 102 

Net advance 3S 

Customers' average buying price IHH 

Customers' average selling price 104 

Average loss, less commissions 7J^ 



10 F r c e s 

Studebaker Corporation 

Opening price, July 1, 1915 76J^ 

Low price for period 763^ 

High price for period 195 

Total advance 1 18% 

Closing price, Feb. 29, 1916 136% 

Net advance 59% 

Customers' average buying price 138% 

Customers' average selling price 135% 

Average loss, less commissions 3% 

Westinghouse Electric 

Opening price, July 1, 1915 48% 

Low price for period 47% 

High price for period 74% 

Total advance 27% 

Closing price, Feb. 29, 1916 63% 

Net advance 14% 

Customers' average buying price 62% 

Customers' average selling price 6134 

Average loss, less commissions 1% 

These tables present convincing, though no doubt some- 
what surprising, evidence of what the average trader makes of 
opportunities to profit. 

Though large gains had been scored by these stocks during 
the period and the traders had operated, for the most part, on 
the long side, the average price at which each stock was purchased 
was higher than the average price at which it was sold. In spite 
of the exceptional opportunities presented during this period, 
these traders, owing to wrong methods, had lost money. 

Waves of Bullishness and Bearishness 

The glaring errors disclosed b}' this study of the six trading 
accounts led Guyon to keep for a year a daily record of the 
total number of shares which his firm bought and sold. The 
periods during which customers were either buying heavily or 
selling heavily were selected for special analysis, and a table 



Buying and Selling Zones 



11 



prepared showing the total number of shares both bought and 
sold during such time. From this table we have prepared 
Figure 2 which presents its results graphically. Periods in 
which buying was preponderant are shown in black and selling 
balances are shown in white. 



115 

110 

„105 

•^100 

95 

90 

85 

250 

^200 

o 
u 

ta 

Sl50 

o 

1 100 

3 
O 
M 

H 50 



■ Purchases Exceeded Sales 


■ 




D Saies 


Exceeded Purchases 


■ 


Im 






A 




rii 




l_r 


>— 


H 


■l ■ ri 


- 


■ 




■ 




■ 


H--' 


"LP Lj 






' 






-^ 




















_, 


-^- 


1 -n d] 


IW 


tti 



Figure 2: When the Public Buys and Sells 

This diagram reveals closely the public's habit of buyinR on bulges and selling on de- 
clines. The columns at the bottom show the extent of this bad buying and bad selling. 



Periods when customers were loading up with slocks were 
followed in each case by a lower range of prices and, with one 
exception, periods when they sold were followed by higher prices. 



12 F r ce s 

The diagram indicates this "bad" buying and "bad" selling 
very clearly. 

Amounts Bought and Sold 

There remains another item of importance in this investiga- 
tion, which is the relative amounts bought and sold at the two 
price levels. From the table showing the total number of shares 
bought and sold the following summary has been made: 

Bought during advance 883,600 shares 

Sold during advance 613,300 

Excess of purchases 270,300 

Sold during declines 437,000 

Bought during declines 366,900 

Excess of sales 70,100 

Customers at high prices bought more than twice as many 
shares as at low prices, in other words, they used big margins 
when stocks were low and small margins when stocks were high. 
Having held Steel in 200 or 300 share lots at $60 a share, they 
took on lots of 400 to 600 shares around $80. Similarly with 
Crucible, Baldwin, Studebaker, and Westinghouse — these 
stocks grew more attractive and were held in larger quantity 
as they went up. The higher the price the heavier the load, 
roughly speaking, describes the situation. 

The market operator in this situation is unsafe. When his 
account is thus rendered top-hea\^^ a decline of ten points from 
high prices wipes out whatever profits were made on a twenty 
point advance from low prices. 

Five Hundred Accounts in Steel Common 

These results disclosed by Don Guyon are confirmed by a 
study of 500 accounts in Steel common made several years ago 
by Thomas Gibson. Mr. Gibson selected as his period of study 
July, 1901, to March, 1903, because Steel sold at approximately 
the same price at both the beginning and close of this period and 



Buying and Selling Zones 13 

hence from a mathematical standpoint the situation was about 
50-50. Whatever was actually done, therefore, that threw the 
results out of the 50-50 class would be pretty clearly an index of 
the traders themselves, their mental processes and methods of 
dealing in stocks. The examination of these five hundred 
accounts disclosed this as the final outcome. 

What the Results Were 

Total deficit on losing accounts 81,245,000 

Total gain on profitable accounts 288,000 

Number of shares, long stock 820,000 

Number of shares, short sales 292,000 

Average price, long stock purchased 425^8 

Average price, short sales 35 ^4 



Eyes to the Front 

The two studies, one made by Mr. Gibson sixteen years ago 
and the other by Don Guyon in recent markets, indicate certain 
errors persistently made by numbers of persons in the market. 
Practically every well-informed person in Wall Street observes 
day after day in market after market that such is the case. 
What, then, is the problem, vital to profits, which we now face? 

The realness of opportunity must be conceded. Profits 
in generous amount were, are, and will be, possible. 

Attempts to take advantage of these opportunities were, 
and are, clumsily made. The wrong methods here dis- 
closed would keep a man poor in any line ot business. 

Traders in their attempt to foresee price changes evi- 
dently look at the wrong things. Unlike the expert 
ball player, golfer, or money maker, they do not keep 
their eye on the ball. 

The conclusion appears evident that what the untrained 
man tends to do as a matter of course, that is, what seems to 
him the obvious thing to do, does not result in a profit. Keener 



14 Forces 

insight, a more penetrating view of what causes price changes, 
in brief a developed financial skill, are essential in securing profits. 
And these qualifications the wise person will cultivate before, 
rather than after, he enters the market. This is the problem 
here set for solution. 

In succeeding chapters and Texts the forces which make 
prices are clearly analyzed, thus enabling the subscriber with 
increased profit to himself, to gauge them in advance. 



CHAPTER II 
MARKET MO\'ES 

The Swing of Prices 

The reader who turns to the financial page of his newspaper 
finds there a table of figures, frequently two columns wide, 
which extends a full page or more in length. This table, in part 
only, is here reproduced. 

NEW YORK STOCK EXCHANGE 



TUESDAY, DEC. 31, 1918 

1918 1917 1916 

Day's sales 933,594 Holiday 920,961 

Year's sales 143,378,095 184,536,371 232,342,807 



Closing 
Bid Ask. 



Sales 



First High Low Last 



Net 
Chge. 



76M 
100^ 
7434 
32 

31M 
44^ 
75 

SlVs 
1291^ 
95 

41^ 
26 



76% 
100% 
75 

32M 
31K 
44^ 
753^ 
51% 
129% 



12,450 
7,300 

11,200 
7,400 

23,600 

16,380 
4,900 
8,400 
6,000 



95^111.000 
41% 11,200 
26%1 10,700 



Am. Smelt. & Ref. . 
Am. Tel. & Tel. . . . 
Baldwin Locomotive 

Int. Nickel 

Kennecott Copper . 
Pennsylvania R. R. 
Rep. Iron & Steel . . 

Studebaker Co 

Union Pacific 

U. S. Steel 

VVestingii. E. M. & d 
Willys-Overland . . . 



75H 
99% 

73H 
32H 
31J^ 
43K 
74% 
50 

129% 
94 
41% 
25 



77 
101 

75^ 
32% 
323^ 
44% 
75% 
51J^ 
130% 
95% 
41% 
26% 



75^ 
99% 

731^ 
31% 
315^ 
43^ 
74 
50 
1285^ 

93H 
40% 
25 



761^ 

100 
74K 
32% 
31% 
44^ 
75% 
51 

129% 
95 

41% 
26% 



+VA 

+ % 
+ 1K 

+ 'A 
+ Vb 
+1% 
+1 
+1% 
+ % 
+1M 
+1% 



Three Types of Moves 

Those who watch the ticker realize that the four prices given 
in the newspaper's table, that is, first, high, low, and last prices 



16 



Forces 



of the day, reveal in only a limited way the exceedingly numerous 
fluctuations which occur. Upon the floor of the Exchange, 
market history is written in terms of eighths and quarters of a 
point. 

This fuller account of a stock's price changes will now be 
shown on a diagram, which taken in connection with the two 




JiiLuary 1,1915 by Mootba to January 1. 1917 



Jauuary 1, tu KePruary l.iaiT 



g¥=E 



^Ld^i=Fa 



86 M 
% 
\ 
H 

8G 

% 
|« 

















■ 










Jan 


uary 


14 


1916 








































































































'1 




























1 






c 
























1 


































































































i 


































































1 






























































1 




























































































































1 
















j 
















































1 




















































































































































n 






























































1 


1 










1 ! 1 1 






1 : 1 






1 








Figure 3: Three Types of Moves in Steel Common 

Daily fluctuations are bullish, the secondary swing is bearish, 
while the primary swing is bullish. 

other parts of the figure presents a matter of considerable 
importance. U. S. Steel the morning of January 14, 1916, 

It advanced to f , then f , then |. 



opened 1600 shares at 85 1. 



Market Moves 17 

Figure 3 C presents every mo\'e, or change in price, which 
occurred during that day. 

The fluctuations themselves were part of a broader mo\'e- 
ment which is termed a secondary swing (see B in Figure 3). 
Steel's record for that January 14th session is indicated by the 
heavier block on the second part of the diagram. Though Steel 
on January 14, was going up, its move in the secondary swing 
was downward. 

This secondary swing, in turn, which in the present instance 
covered approximately a calendar month, was part of a still 
broader range of prices, termed a primary move (see A in Figure 
3). Steel's secondary swing, shown in B, has in the diagram of 
the primary move been indicated by a heavier block. While 
Steel's position in the secondary swing was bearish, its position 
in the primary swing was bullish. 

Studies of other stocks could be made which would show 
moves very much similar to these presented in Figure 3. 

Dow's Law 

The changes in prices just cited have been described by the 
late Charles H. Dow, a founder of the Wall Street Journal and 
a trader of rare insight, in a way which has since been termed 
Dow's law of market movements. This is his description : 

"The course of prices over a long period of time resembles 
the course of a winding river which doubles on itself again and 
again, so that in traveling from one point to another, distant 
perhaps twenty miles in a straight line, it will actually traverse 
a distance of fifty or sixty miles in making those twenty, and 
will often travel for some miles in a direction opposite to that 
of its ultimate or true course. Furthermore, the course is full 
of eddies which keep the straws on its surface twisting and 
turning back and forth all the time. 

"The ultimate or true course of the river is called the primary 
movement of prices and it expresses the gradual adjustment ot 
prices to investment values resulting from the operations of 



18 F r ce s 

in\estors — viz., those who buy stocks for income rather than 
for speculation. By value is meant the relation of the earning 
capacity and dividend yield of a company's stock to the general 
value of money, so measured by interest rates. The secondary 
movements or swings are likened to the river's doublings and 
twistings, and are due mainly to the operations of margin specu- 
lators. The surface eddies are the daily fluctuations which 
reflect mainly the activities of the floor traders who operate in 
the Exchange. Sometimes the surface eddy doubled on the 
actual flow of the current, and sometimes the actual flow of the 
current doubled on the river's true course. Traders' operations 
are always intimately correlated to and interwoven with those 
of the margin speculators and those of the margin speculators 
with those of the investor, the whole forming the continuous 
current of the river." 



A Little Scene in the Broker's Office 

What connection has this study of moves with the average 
trader's wrong methods shown in Figure 2, and with a person's 
own plans to deal profitably in securities? The answer to this 
question can be presented with some little realism in the follow- 
ing instance, the like of which occurs in many a broker's 
office. 

Assume that January 14th, when U. S. Steel was fluctuating 
around 85|, Mr. Average Man had dropped into his broker's 
office "just to see how the market opens." Stocks are firm. 
Steel appears upon the tape— 1600: 85|, 1000: 85|, 2200: 85f. 

"Steel looks good this morning," suggests the customers' 
man. 

"There's one thing you can depend upon," sagely observes 
a graybeard seated for the day near the ticker. "Those who 
sold their stocks on news of this Mexican situation will have to 
climb for them in a few days. That's certain." He was com- 
fortably long of stocks. 

Steel appears upon the tape: 85| — a half-point up already 
from last night's close. "Buy me a 100 Steel at | quick," says 



Market Moves 19 

Mr. Average Man. He gets it at f much to his surprise and 
when a few minutes later it touches \ a chilly feeling creeps over 
him. His confidence revives as Steel from that point mounts 
again, and when in due time it touches 86 he leaves the office 
quite satisfied with himself. 

Why did he purchase Steel? 

Was it for a turn of a point or two? 

Or because he believed a secondary swing upward was taking 
place? 

Or was he thinking ahead in terms of the long pull? 

The diagram shows full well the dangers ahead for the man 
who merely bought, without having in mind a clear idea of why. 

Perspective 

The chances are fifty to one that the average man in Wall 
Street under circumstances such as have been stated thinks only 
"Steel is going up." No doubt at the time Steel is going up. 
But what sort of a move is on? Is this the sort of move that 
fits into his trading, or speculative investment, or investment 
plan? These are questions which this average man ought to 
think over before he puts in his order, although as a rule it is 
after, if at all, that he giv^es them serious consideration. Con- 
sequently he lacks perspective, buys or sells without foresight, 
flounders, and commits the stupid blunders which work such 
havoc with his profit and loss record. These errors are all the 
more irritating because in large part so unnecessary. 

The stock market with respect to its moves is a sort of wheel 
within wheel affair composed of an outer rim which mo\es with 
broad regularity, inner gears which upon occasion run in re\'erse 
direction, and in the center a small, active balance wheel which 
continuously turns this way and that. Tr\-ing to watch all 
these wheels at the same time, without noticing how dilTcrent 
are their respective mo\'emcnts, will likely lea\'e a person dizzy 
— in prime condition to commit the errors cited in the pre- 
ceding chapter. But tlu> knowledge that market mo\os consist 
of three classes and that while these three ma>' pn^ceed together 



20 Forces 

they very commonly go in opposite directions, provides those 
interested in the market a distinctly useful point of view. It 
simplifies their problem and renders it more definite. With 
this simplified and more definite problem in mind, you can the 
better keep your eye upon the particular forces which, in what- 
ever of these three kinds of moves has been selected, there 
operate to make prices. 

But what constitute the market forces themselves? Where 
can they be located? These are also essential questions, to 
whose answer several chapters will now be devoted. 



CHAPTER III 
PRICE MOVES FROM THE INSIDE 

Demand and Supply 

"Why do prices go up or down?" The question was put by 
a customer to his broker, a man of long experience in whom 
age evidently had bred conservatism. 

"Prices of stocks go up," the broker declared after a due 
pause, "when there are more buyers than sellers at a given price 
level, and go down when there are more sellers than buyers." 

Demand and supply, in other words, was the idea he intended 
to convey by this apparently safe platitude — which incidentally^ 
in the way he stated it, was inaccurate. 

It is true, of course, that the conditions of demand and 
supply change continuously, which in turn brings about bids, 
and offers at new levels, either higher or lower; but this con- 
ception, while of some use, does not really explain very much. 
We must get behind demand and supply merely as terms, to- 
the forces, which, by creating new conditions in the minds of 
buyers and sellers, make the market price. 

The Market Dynamic in Nature 

What we wish to convey by the above statements is that 
price making is always a dynamic process, in which buyers press 
for lower terms and sellers seek for higher. Consequently, 
markets are in a state of i\ux, with quotations always in process 
of change. 

It is the tendency of human nature, however, to think in 
static terms, which means nothing more than that people readily 
form habits which it requires effort on their part to break and 
that in consequence they are inclined to believe existing conditions 
will continue as they are. 



22 F o r c e s 

When the market is dull and depressed, those interested in 
stocks find it hard to see in such conditions the prelude to a 
period of activity and higher prices. When prices are near the 
top and the reports on all sides say the country was never before 
so prosperous, they assume confidently that, while other booms 
have not lasted, this one, due to circumstances unlike those of 
preceding booms, is here to stay. 

This conflict between dynamic markets and static mental 
tendencies has worsted more followers of the Exchange than a few. 



Board Room "Rust" 

These static mental tendencies usually grip closely the person 
whom those at a distance from the market are in the habit of 
envying on account of what they consider his exceptional ad- 
vantages, viz. the office habitue. Very commonly this daily 
scanner of ticker tape and board is found seated listlessly before 
the latter, a blase individual who watches the hurrying board 
boy change the quotations here and there. 

What do these quotations mean to him? The United States 
Steel Corporation has long since shriveled into a mere bit of 
cardboard, size 2x4. Its belching furnaces, ore docks, thousands 
of employes, wonderful new plants, taxes, unfilled orders or net 
profits do not disturb his thought because, the victim of what 
has been very well termed board room "rust," his mind has 
become too warped to admit them. Union Pacific with its mag- 
nificent roadbeds and low costs per ton mile, Anaconda with its 
chain of mines and smelters, International Mercantile Marine 
with its famous liners, and Bethlehem Steel, the child of Schwab's 
brain — it is all the same ; shorn of every feature of their 
real selves, these great properties are to him but automa- 
tons condemned for five hours daily to strut upon the market 
stage. 

The account of price changes which these board room 
"rusters," behind clouds of smoke, pass freely among themselves 
are quite in keeping. 



Price Moves fro m the I u s i d e 



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a £ "" 



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ill 

^23 



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c; j2 .2 



rt u 

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U < CO cd 

j: -r ^ o 
He--' 

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24 F o r c e s 

"I hear they are going to put up Corn this time for sure." 
"Can is tipped up for a rise." 

"Insiders are picking up Reading on every decHne." 
"Lipper bought 7,000 Steel; Pynchon is selling Crucible." 
"I have it straight that the back dividends on Marine will 
be cleared away at this week's meeting" — ^which being inter- 
preted likely means that a good friend of his knows a man whose 
father-in-law had it from the assistant to one of the directors to 
"watch Marine, there's going to be something doing in it!" 

"The Big Interests Are Buying" 

The inexperienced trader is, in fact, hard put to it for e.x- 
planations of what is taking place. When the market sells olif 
on good news, advances on bad news or breaks out of its rut 
into sudden strength or weakness without any cause, so far as 
he can tell, he becomes pretty well tangled in his thinking. 
Since an explanation he must have, he discovers a mysterious 
"they" who control the m.arket; prices go off because "they" 
put them down; prices advance if "they" put them up. 

With increasing experience, this trader after a time has 
rendered his "they" somewhat more definite in the person of 
some powerful operator or operators. Years since when the 
market went up, Commodore \"anderbilt was declared to be the 
buyer; when it went down Daniel Drew was the seller. Later, 
the name Jay Gould w^as breathed every time a market move 
needed explanation. Still later it was E. H. Harriman, then 
Daniel G. Reid, more recently still Charles Schwab or the Gary- 
Morgan "crowd" or Jesse Livermore. In cases of doubt "the 
big interests" are made to do service. 

Had these operators actually put through all the transactions 
with which they were credited, the Bank of England could not 
have financed them nor the big Exchange room itself hold all 
their securities. 

Surface Effects vs. Underlying Causes 

What has been said indicates pretty clearly that the majority 
of persons interested in the stock market keep their eye upon the 



Price M ov e s f r m the Inside 25 

surface effects, instead of underlying causes. They often thereby 
are captivated and dazzled and bewildered — but seldom profited. 

The statement of the problem indicates the method for its 
correct solution. "They" as an ail-sufficient explanation, needs 
to be supplemented by the willingness to search for causes; 
over-worked remarks about what "the big interests" are doing 
should give way to the idea of market forces. One must get 
behind the quotations to the forces which make them. 

The Exchange floor ought to be regarded simply for what it 
is, the scene of incessant struggles between bulls and bears or 
in other words, between forces which make for higher prices and 
forces which make for lower. It may be the tussle is temporarily 
a deadlock which, when broken after a time, results in a lively 
day on the Exchange, a two-million or so turnover with pos- 
sibly three points average advance or decline. Then a period 
of quiesence may ensue, a sort of lull between storms. How- 
ever long particular conditions exist, forces as they wax or wane, 
make the market. 

The study of these forces supplies the essential foundation 
upon which success in the market, year after year, depends. 

Persons interested in the market ma>' very well regard such 
study as constituting the alphabet of their business; and those 
who, in their present preoccupation with tips, "inside" infor- 
mation, the news, etc., have not yet appreciated its value are 
deceiving themselves with Wall Street's skillful camouflage. 
With respect to our own operations, whether these be in\-est- 
ment, speculation, speculati\e iinestment, or the tiiiancing of 
enterprises, are we read>' to pierce through this surtace cam- 
ouflage and act upon sound conclusions? 

Every niovement in i)rices is due to certain forces. 

The presence of these forces should not be denied simply 
because you do not see them. 

Neither tips, nor a \'ague sense of wontler. nor idle gossip 
should prevent you from seeking out these torce^ which make 
the market. 

These forces, once recognized and the manner of their opera- 
tion learned, rendi'r \<)u a real insider, one iclio knoics. 



CHAPTER IV 
TWENTY YEARS IN THE STOCK MARKET 

Broad View of the Market 

Those who want to lay a solid foundation upon which they 
later can deal with success, realize the importance of gaining at 
the outset a broad view of the market. This broad view enables 
them to see how the market's forces operate in setting prices; 
and because several years' operations upon the Exchange are 
surveyed, it provides them a sound perspective. Having 
acquired perspective, the average person, with whom inexperi- 
ence is a serious drawback, is in a position to derive a decided 
gain; while he cannot buy and sell in these markets of the past, 
he can study them and, his experience in this v.'ay much ex- 
panded, enter the present market with surer touch. 

For this purpose, that the reader acquire market perspective 
and see what forces have operated to produce price changes in 
the past, we have summarized within a few pages the events of 
twenty years. Needless to say, the account which follows is 
much condensed; the limits of space are such that countless 
details have been stripped away and only the broad outlines 
presented. 

The Stock Market in Profile 

The broad outlines of market history let us picture first 
graphically. For this purpose a considerable number of repre- 
sentative stocks, both rails and industrials, have been averaged 
in price and these averages in turn plotted on graph paper. 
Figure 5 accordingly shows the main swings of the market. 

A preliminary survey of this chart shows that stock-market 



Twenty Years in the Stock Market 27 

prices tend to move in cycles with minor fluctuations during the 
big upswings and downturns of each cycle. 

The first cycle began in 1900 and ended in 1903. The 
upswing lasted two years and the decline about twelve months. 
The principal irregularities were a minor reaction in 1901 during 
the upward movement and a tcmporar\' ralK' in Januar\-, 1903 
after the decline had set in. 



1: Ul Wl IW. 1!)U.( I'.IUI VMl' I'JUU 1!)U; I'JUS I'JU'J lUlO I'Jll I'll.' l'J13 I'JH I'JlJ I'JIO I'Jl" !J13 lUl'J 




Figure 5: The Stock Market in Profile 

The market's broad swings since the first of January, 1900, are here shown graphically. 
Dow-Jones averages were used previous to the closing of tlie Exchange in 1914, and the New 
York Times averages since. 



The important question for the investor is to know what 
were the underlying influences causing prices to advance two 
years and decline twelve months, for the big opportunities for 
accumulating profits cited at the beginning of this present Text 
lie in taking advantage of the long-pull moves of the cycle. Let 
us then study this cycle of 1900-1903 and attempt to separate 
the chaff from the wheat. B\' chaff wc mean the factors which 



28 



F r c e s 



cause only the ripples which appear on the general tide of 
prices. 



Cycle 1900-1903 

The factors of primary importance during this cycle in de- 
termining the trend of prices are grouped below, classified into 
two groups — favorable or unfavorable. Let us first note that 
the ad\ance during the two years 1900-1902 amounted to about 
$50 in the railway shares on the average and about $20 in the 
industrials. The important factors which influenced Wall 
Street during these two years were as follows: 



Stock Market Influences, 1900-1902 



Favorable Factors 

1. Large exports of Boer War. 
This meant profits to American ex- 
porters and easy money conditions 
in Wall Street so long as Europe sent 
gold in payment for American mer- 
chandise. 

2. The adoption of the gold 
standard by Congress in 1900, defi- 
nitely removing the uncertainty 
which had prevailed while Mr. 
Bryan was engaged in his free silver 
campaigns. 

3. The formation of large corpor- 
ate combinations, such as the United 
States Steel Corporation and also rail- 
way mergers bringing vast railway 
mileage under Wall Street control. 

4. The rapid increase in the gold 
production in the Klondike and 
South Africa, which provided the 
banks with abundant reserves. 

5. The struggle for control of 
Northern Pacific, causing the stock 
to go to $1,000 per share. 

6. Good crops, except a short 
corn crop in 1901. 



Unfavorable Factors 

1. Bryan's nomination in 1900. 

2. Strikes at the steel mills and 
anthracite coal mines. 

3. Drouth in 1901 affecting the 
crops, especially corn. 

4. The Galveston flood. 

5. The assassination of President 
McKinley. 

6. The Boxer troubles in China. 

7. The panic among investors 
after J\Iay 9, 1901, when the North- 
ern Pacific corner collapsed. 

8. Disappointment regarding 
earnings of industrial combinations 
in 1902, causing dividend reductions. 

9. Failure of attempt to peg 
copper prices at end of 1901. 

10. Beginning of Northern Secu- 
rities suit to stop railway mergers in 
1902. 

11. Ending of the Boer War in 
1902, meaning a loss of export trade 
and necessity of exporting gold to 
Europe. 



Twenty Years in the Stock Market 29 

The lesson to be drawn from above table of events is that 
the business world is complex. The inexperienced investor is 
likely to imagine that a single factor upon which he has his 
eye will prove the dominating influence. He is not able to 
balance all of the factors in the situation and judge correctly 
which factors will prove to dominate the market. For instance, 
the assassination of President McKinley or the Galveston 
flood occupied so much space in the newspapers temporarily 
that untrained investors in many cases doubtless forgot such 
fundamental considerations as the volume of business arising 
froni the export trade during the Boer War, the crops, and the 
vigorous and efficient efforts of nearly one hundred millions of 
people to produce profits from the internal developnient of the 
United States. 

Upon sober reflection, of course, it is e\ident that the wealth 
destroyed by the Galveston flood could have little influence upon 
the profits of a majority of business enterprises, and that the 
assassination of President McKinley would not interfere with 
the transportation of merchandise or the manufacture of steel. 
Labor troubles, also, could not impair profits greatly unless 
they resulted in a complete stoppage of business for many 
months, but experience shows that the necessity of earning a 
living forces capital and labor to get together in some fashion 
without a long stoppage of industry. 

But the question remains. "What caused prices to advance 
during 1900-1902?" The fact that they did advance show^s that 
the favorable factors more than offset the unfavorable influences. 
The most fundamental factors were the easy money rates in 
Wall Street during 1900-1901, the export demand for American 
goods, and the fact, also, that selling prices generalK' adxanced 
faster than wages during these years, resulting in abnornialK- 
large commercial profits. 

Let us now consider the events which caused the markt'd 
decline in 1903. 



30 Forces 

Stock Market Influences, 1903 

Favorable Factors Unfavorable Factors 

1. Fair crops. 1. Large gold exports, causing 

2. Active merchandising. tight money in Wall Street. 

3. Fairly settled social condi- 2. Congestion of unsalable se- 
tions. curities in Wall Street, when banking 

funds were depleted. 

3. Decision in Northern Securi- 
ties case unfavorable to Wall Street 
control of railways. 

4. Receivership for shipping com- 
bination. 

5. Labor troubles. 

6. Depression in steel industry. 

The dominating factors in the dechne of 1903 were the tight 
money situation arising from gold exports, which checked lend- 
ing on securities, and the decision in the Northern Securities 
case, which affected market sentiment and made investors lose 
faith in the ability of Wall Street financiers to maintain values 
created through high finance. 



Cycle 1904-1908 

Let us now consider the cycle 1904-1908. This cycle like 
the preceding one exhibits an advance of about two years and 
a decline of about twelve months. From the autumn of 1904 
until the autumn of 1906 there was an advance of about $40 per 
share in railroad stocks and an increase of about $55 per share in 
the industrials. 

The market did not advance during the first half of 1904 on 
account of a poor winter wheat crop and the outbreak of the 
Russo-Japanese War. Before the end of the year, however, it 
was found that other crops were good and that the sale of 
supplies to Japan would add to the prosperity of many corpora- 
tions. By the summer of 1904, also, capital had become ex- 
tremely abundant in Europe and the L^nited States. 

Among the more important factors which entered into Wall 



Twenty Years in the Stock Market 31 

Street discussion during the two-year ad\-ance of this c\cle were 
the following: 



Stock Market Influences 

Favorable Factors 
1904 

1. Government states the 
Northern Security decision does not 
mean that the Attorney General is 
"running amuck." 

2. Exportation of gold subsides; 
money becomes easy. 

3. Democrats nominate Alton 
B. Parker; Roosevelt's election as- 
sured. 

4. Good corn crop. 

5. Exports to Japan. 

1905 

6. Iron market advances. 

7. Railways order equipment. 

8. Rumors of combinations. 

9. Dividends increased, notably 
on Steel Common, Union Pacific, 
Southern Pacific and Pennsylvania. 

1906 

10. Large crops; railway traffic 
heavy. 



Unfavorable Factors 



1904 



1. Poor winter wheat. 

2. Financial uncertainty upon 
outbreak of Russo-Japanese War. 

3. Russia and Japan sign treaty 
in autumn 1905. 

4. In December, 1905, money 
market tight in sympathy with 
European prices; call money rates 
125 per cent. 

1906 

5. Hepburn railway rate bill 
enacted.' Congress becomes gener- 
ally hostile to corporations. 

6. San Francisco earthquake 
causes insurance companies to sell 
bonds to secure indemnity funds. 

7. Capital scarce in Europe, 
Bank of England rate 6 per cent. 



By the end of 1906, the fiivorablc influence of large crops and 
extraordinary business profits was fully offset h\- the unfa\oral)le 
effect of high interest rates, reflecting an rxhaustion of cai^ilal. 
The world over, there were symptoms of a crisis. In Japan, 
Chile, Egypt, London, New York, and, in fact, in all parts of 
the world high prices had caused such an extension of bank loans 
that the bankers could little afford to risk further assistance to 
commercial expansion. Borrowers were making hea\y with- 
drawals of gold from the banks in order to pa\ the debts con- 
tracted on the basis of high prices. The bankers began to 
discriminate against stock exchange borrowers in order to assist 



32 



F r c e s 



merchants to carry on their operations. The result was a slump 
on the stock exchange late in 1906, which continued in 1907 
until November, except for an occasional rally of a few points in 
the spring and in July. Railroad stocks declined fully $50 a 
share and industrials nearly as much. 

At the time, a good many speculators thought the decline 
was due mainly to the hostility of President Roosevelt and 
Congress toward corporations, but even though this may have 
dampened market sentiment, the fundamental cause was an 
exhaustion of capital. Among the factors prominent as market 
forces during this memorable year of 1907 were the following: 



Stock Market Influences, 1907 



Favorable Factors 

1. Trade supported by large 
crops of 1906 and good corn crop of 
1907. 



Unfavorable Factors 

1. Abnormally high operating 
expenses impair profits. 

2. Commerce Commission in- 
vestigates Harriman railway lines. 

3. Bond syndicates unable to 
sell new security issues because of 
exhaustion of capital. 

4. Continuation of trust prose- 
cutions. 

5. State authorities active in 
regulating railways; clash with Fed- 
eral authorities. 

6. Judge Landis fines Standard 
Oil §29,000,000. 

7. Copper trade slumps. 

8. Knickerbocker Trust Com- 
pany fails. 



Bull Market of 1908-1909 

After the panic had passed, it was found that the properties 
built up during the preceding period of prosperity were physically' 
intact; that in 1908 the crops were growing as usual, and that as 
a result of the crisis wages were low and materials cheap. Owing 
to the general halt of business during the latter part of 1907 and 



Twenty Years in the Stock Market 3>i 

the early part of 1908, capital rapidly accumulated, not onl\' in 
the United States but in England and on the Continent. 

By the summer of 1908 conditions were ripe for an advance, 
and during 1908-1909 stock price fully reco\ered the losses of 
the preceding panic. Rails ad\anced S50 a share and indus- 
trials nearly as much. 

The following were prominent market influences: 

Stock Market Influences, 1908-1909 

Favorable Factors Unfavorable Factors 

1. Low wages and cheap ma- 1. Railroad receiverships, 
terials. 2. Anti-trust suit against Xew 

2. Accumulation of capital caus- Haven road. 

ing decline in money rates. 3. President Taft recommends 

3. Freight rates increased. tax on corporation incomes. 

4. Increase in tariff duties in 4. Harriman, leading market 
1909 considered favorable. general, becomes ill. 

5. Expansion in iron and steel 5. Europe begins to resell Ameri- 
industrj-. can stocks bought during panic of 

1907. 

Reaction in 1910 

At the beginning of 1910 speculators in Wall Street were 
wvy much confused. Capital was still fairly plentiful in 
London and Paris and the railroad promoters in the I'nited 
States who were accustomed to borrow heavily in Europe had 
big plans for the future. Nevertheless, the chart on page 27 
shows that stocks declined about S25 a share on the a\erage 
during the first seven months of 1910. 

The Interstate Commerce Commission rendered a decision, 
the tendency of which was to undermine confidence in railway 
securities, and for \arious reasons investors in England and 
Holland sold back American securities which they had pur- 
chased during the panic of 1907. It is estimated that this re- 
selling from Europe amounted to ;?150,000,(H)0. The reason 
for such selling was partly the restrictive political acts at Wash- 
ington regarding the railways and partly the fact that European 
investors began to find attractive investment opportunities in 



34 Forces 

other parts of the world at this time. An important consider- 
ation, also, was that they had bought stocks during the panic 
because they were cheap and in anticipation of making a profit, 
and the wild ball market in Wall Street in 1909 gave them the 
expected opportunity to sell at a big profit. That is, they sold 
because prices were high. 

The following table summarizes the events considered im- 
portant market influences during this year. 

Stock Market Influences, 1910 

Favorable Factors Unfavorable Factors 

1. Fair crops. 1. President Taft recommends 

2. President's annual message in increased powers for Commerce Corn- 
December reassuring. mission. 

2. Collapse of Hocking Coal and 
Iron Pool. 

3. Anti-Trust agitation. 

4. Money situation tightens. 

5. Commerce Commission makes 
sweeping reductions of railway rates. 

Irregularity 1911-1914 

The three years following 1910 were unfavorable to the 
■development of a normal stock-market cycle. 

In 1911 and again in 1912 speculators courageously ad- 
vanced prices, but in each year the bull movement collapsed. 
In July and August, 1911, speculators were thrown into con- 
fusion. They would talk about the short corn crop one day 
and the prosecution of the steel trust the next day as a cause of 
the market's weakness. The fact was, however, that the un- 
settlement of the financial markets in Europe caused by the 
Moroccan dispute was the dominating influence. The Kaiser 
threatened to employ violence in dealing with France, and Lloyd 
George intimated that any move against France would prejudice 
British interests in Africa and that Great Britain might be ex- 
pected to take a hand in any war that de\eloped. Many 



Twenty Years in the Stock Market 35 

bankers withdrew funds from Switzerland and Berlin, and 
British speculators sold stocks heavily in Wall Street. This 
fact now has come to be regarded as the dominating influence, 
although at the time Wall Street actually thought other con- 
siderations were more important. 

The following table shows the market factors which governed 
Wall Street activities during 1911: 

Stock Market Influences, 1911 

Favorable Factors Unfavorable Factors 

1. Easy money conditions. 1. Commerce Commission sus- 

2. Supreme Court announces Pends rate increases. 

"rule of reason" in dissolving Stand- 2. New York Central reduces 

ard Oil and American Tobacco div-idends. 

trusts. 3. Standard Oil and .\mcrican 

3. Orders for steel increase to- Tobacco dissolved. 

ward end of the year. 4. Moroccan crisis causes panic 

in Europe and dumping of .\merican 
securities on New York market. 

5. Attorney-General begins suit 
against U. S. Steel Corporation. 

In l'>12, on the basis of good crops and a rapidK' growing 
demand for steel, not only for industrial purposes in the United 
States but for exportation abroad, the stock market adv'anced. 
As in the preceding year, howev^er, the advance was brought to 
a halt by political conditions in Europe. 

About the first of October the Balkan states made war 
against Turke\' and there was danger that the big powers would 
be drawn in. The Balkan War continued into the year 1913 
and the settlement b\' the Treaty of Bucharest was so indecisi\e 
that it left Austria and Germany at daggers' points with Russia 
and iur allies in Western Elurope. It was only a question of 
time until war would break out, and a stream of stocks flowed 
steadily into W'.iil Street from the boxes of well-informed capital- 
ists abroad during the first half of 1914. N'e\ertheless, Wall 
Street became optimistic and looked for better things in 1914, 



36 



Forces 



and American optimism had a strong foundation in large grain- 
crops and a record cotton crop. But just as an autumn bull 
market was expected to begin, the Great War broke out. 

The following table reviews the events of the three years, 
1912-14: 



Stock Market Influences 1912-1914 



Favorable Factors 

1. Record corn crop in 1912. 

2. Large exports of steel. 

3. Large crops in 1914. 

4. Congress passes Federal Re- 
:serve Act. 



Unfavorable Factors 

1. Democratic Congress decides 
on investigation of "money trust." 

2. Flood in Mississippi River. 

3. Balkan War in autumn of 
1912 causes Europe to sell American 
stock. 

4. Republican party splits. Wil- 
son and Democratic Congress elected, 
making tariff reductions certain. 

5. Union-Southern Pacific mer- 
ger dissolved by Supreme Court, 
December, 1912. 

6. President Wilson's speeches 
after election antagonistic to big 
business men. 

7. Revolution in Mexico early 
in 1913; Taft withholds action, leav- 
ing problem to Wilson. 

8. Democrats in Congress at- 
tack profits and wealth. 

9. Poor corn crop in 1913. 

10. Settlement of Balkan War 
leaves Austria and Russia at daggers' 
points. 

11. New Haven Road suspends 
dividends. 

12. Commerce Com'n suspends 
proposed freight increases in 1914. 

13. Great War breaks out in 
Europe. 

14. Stock market flooded with 
foreign holdings; Stock Exchange 
closed. 



Twenty Years in the Stock Market 37 

War Boom 

The Stock Exchange remained closed from the end of July 
until December. During this period Wall Street bankers were 
busily engaged in making remittances of gold to England to pay 
the debts of certain railways and cities, including New York, 
which matured during those months. Finally the debts were 
largely settled and Charles M. Schwab returned from his inter- 
view with Lord Kitchener with large contracts for war supplies. 
About this time, also, France and England had depleted their 
stocks of commodities and urgently needed war supplies of all 
kinds. 

Then followed two years of "war order" prosperity, industrial 
stocks advancing S35 a share on the average during 1914—1916. 
The rails recovered only about $20 a share from the war panic, 
remaining heavy on account of continual selling from England. 

The following table gives the leading events of 1915-1916: 



Stock Market Influences, 191 

Favorable Factors 

1. Charles M. .Schwab obtains 
large orders for war supplies from 
England. Orders for other com- 
panies follow. 

2. Wages and prices low follow- 
ing panic of 1914. 

3. Large exports of food stufTs at 
high prices. 

4. Money conditions become e.\- 
tremely easy, discount rates 232 to 3 
per cent. 

5. Large gold imports from Eu- 
rope. 

6. U. S. Steel wins anti-trust 
suit in lower court. 

7. France and England sell S500,- 
000,000 .Anglo-French notes, insur- 
ing further demand for war supplies. 

8. Record wheat crop. 

9. In 1916 exports continue large. 



5-1916 

Unfavorable Factors 

1. Lusitania sunk in May, 1915. 

2. Mexican problem continues. 

3. Early in 1916 German sub- 
marine activity indicates U. S. may 
be drawn into the war. 

4. Peace rumors and top-heavy 
prices adversely affect war-order 
stocks. 

5. Carranza captures .American 
troops. 

6. German U-53 raids .Atlantic 
Coast, autumn of 1916. 

7. Crops in 1916 less favorable 
than in 1915. 

8. .Market collapses in confusion 
during peace move by Germany. 

9. President's Peace Note and 
Lansing's "verge of war" statement 
in December, 1916. 



44746ii 




St. Paul's Daily News 

Figure 6: From Cause to Effect 



Metropolitan 



When business expands to enormous proixjrtions or when severe contraction ensues, the Stock Exchange becomes 
prominent since these commercial and financial conditions there focus. Wall Street, the mobilizer of capital, flourishes 
or languishes as its countless borrowers and lenders flourish or languish. 



Twenty Years in the Stock Market 39 

America in the War 

The period of participation in the war by the United States 
was marked by a decline of $35 on the average when the war 
broke out and irregularity until the armistice was signed. 
Despite large profits, federal taxes prejudiced the position of 
the stockholder. Moreover, speculative demonstrations were 
frowned upon during war time. After the armistice was signed. 
however, the directors of most American corporations found 
themselves possessed with large "undiscounted" profits, which 
had accumulated during 1918, and as the Allies and the American 
government gradually settled the claims of these corporations 
for work done, numerous plans were proposed to capitalize the 
war profits by issuing stock dividends, or declaring distributions 
in cash or Liberty Bonds. The recovery from the low levels of 
the war period until the summer of 1919 amounted to about 
$35 a share in the industrial stocks. The rails reco\'ered only 
$15 on account of uncertainty as to how Congress would dispose 
of the railway problem. 

The following table summarizes thee\'entsof the years 1917- 
1919: 

Stock Market Influences, 1917-1919 

Favorable Factors Unfavorable Factors 

1. Entrance into war by U. S. 1. Unrestricted submarine war- 
means large demand for war supplies. fare by Germany causes disaster to 

2. Decline in rails halted by shipping and confuses market senti- 
Government guarantee of income on mcnt. 

December 26, 1917. 2. Federal war taxes cause un- 

3. Guarantee of minimum price certainty regarding earnings. 

for wheat promises large crops and 3. Russian Imperial Govern- 
therefore heavj' volume of trade. ment overthrown March, 1917. 

4. Weakening of German morale, 4. Federal price fixing initiated 
August, 1918, causes optimism. summer, 1917. 

5. Following Armistice, Nov. 11, 5. (Operating expenses increased, 
1918, corporation officials find them- railroads in sad plight. 

selves possessors of large undis- 
tributed surpluses; certainty of ex- 
tra dividends or stock dividends cause 
price advances, March to July, 1919. 



40 Forces 

Stock Market Influences, 1917-1919 (continued) 

Favorable Factors Unfavorable Factors 

6. War savings flow into the 6. Italian army suffers disaster. 
stock market during spring and sum- 7. Bolsheviks overthrow Keren- 
mer, 1919. sky government. 

7. President Wilson refuses de- 8. Collapse of foreign exchanges 
mand to increase railway wages; indicates check to exports. 

Judge Gary refuses to confer with 9. Demands of railway employes 

radical labor agitators. and strike in steel industry dampens 

speculative enthusiasm. 

America After the War 

Immediately after the signing of the Armistice came the 
natural reaction from the speculative furore of the War. In 
early 1919, however, the pent-up demand for goods made itself 
felt and we entered into a period of inflation. This culminated 
in the Fall and early months of 1920. Then followed one of the 
most drastic readjustments that the country has ever experi- 
enced. 

The first industries to liquidate were the Silk, Textile, Woolen 
and Leather. These were directly followed by others until by 
the Fall of 1920 most industries were well into a period of liqui- 
dation. Raw producers were most adversely effected, particu- 
larly the farmer. Liquidation of food products continued until 
Wheat sold below $1.00 against a fixed price of $2.70 during 
the War, while Corn and Oats went below 50 cents. As the 
farmer afford-s 35% to 40% of the total purchasing power of 
the country this brought a most severe depression. Such de- 
pression continued through late 1920 and through 1921. 

In the year 1921 this resulted in a marked easing in money 
conditions due to the fact that the loans of the war period were 
being paid up and that business did not demand much new 
capital. The natural result of these increased funds was, 
first, the largest upward movement in bond prices in years, 
second, the use of funds in speculation. 

The stock market, discounting the natural improvement in 
business, following such a deflation, rose an average of 2>5 points 
from the lows of June-August, 1921, without any reaction of 



Twenty Years i7i the Stock Market 41 



importance. Due to the varying effects of the deflation^ 
ho\ve\er, the advance was very uneven, equipment, construc- 
tion, food, and chain store stocks rising greatly, while tire and 
rubber, fertilizer, copper, oil and iron and steel stocks, due tO' 
the over-expansion of the war in these various industries, lagged 
perceptibly. 

Stock Market Influences 1920-1922 



Favorable Factors 

1. Good crops. 

2. Improving money conditions. 

3. Ending of the period of 
inflation which had brought such 
extravagance. 

4. Republican President elected 
which was supposed to be favorable 
to business. 

5. Export trade continued good 
in spite of readjustment. 

6. Investment securities ad- 
vance rapidly in price. 

7. Savings bank deposits in- 
crease. 

8. Reserve in Federal Reserve 
Banks increase rapidly. 

9. Loans and re-discounts in 
Federal Reserve Banks decline radi- 
cally. 

10. Continuance of large gold im- 
ports. 

11. Full tni|)l()yment at high 
wages toward end of 1922. 



Unfavorable Factors 

1. Unparalleled decline in 
commodity prices. 

2. Heavy inventory losses by 
most industrial companies. 

3. Many industrial companies 
operating at large deficit. 

4. Continued declines in foreign 
exchanges. 

5. The failure of labor to liqui- 
date and to decline in price in propor- 
tion to commodity prices. 

6. General unrest. 

7. Continued high taxation. 

8. Hands of Republican admin- 
istration tied by Congress. 

9. Position of the Farmers 
becomes the worst in thirty years. 

10. Purchasing power of nation 
declines rapidly. 

11. Railroads fail to earn amount 
outlined for them in War legislation. 

12. Failures are the greatest in 
years. 

13. Unwise tariff legislation. 

14. Great unemployment. 

15. Unequal declines in various 
commodity prices lead to much 
uncertainty and dissatisfaction. 



What Next We Consider 



Thinking over the foregoing tables leads a man to iIr- essen- 
tial viewpoint, that prices arc made by forces, and that in 
seeking out these forces he works from cause to effect. 



42 F r c e s 

There is another conclusion which he will draw, which is 
scarcely less valuable. These tables containing briefly summa- 
rized forces which have made prices, are composed of two 
columns, favorable and unfavorable. No situation has ever been 
so favorable that certain adverse factors did not at the same time 
exist, and never is a bearish situation without some bullish 
factors. What takes place with respect to prices depends upon 
which set of factors exerts stronger influence. The favorable 
factors decidedly in the ascendant, prices mount; the unfavor- 
able factors predominant, prices fall. The exchange floor at all 
times represents a tussle between forces which make for higher 
prices and forces which make for lower. 

This broad survey of forces which make prices will now be 
followed by a closer examination of how the process works. 
The first phases of this examination, called "From Gross to 
Dividends," takes us into the financial structure of the cor- 
poration itself. 



CHAPTER V 
FROM GROSS TO DnTDEXDS 

A Study in Corporation Finance 

The paragraphs in the preceding chapter contain a sound 
summary of items which were the principal forces setting prices 
during the past twenty years, and it is safe to say some of them 
will still be in harness making markets when the \-oungest 
subscriber has grown gray in financial wisdom. 

Let us now study further, in the attempt to see more clearly 
how these forces exert their influence in the market. This next 
step takes us into corporation finance. 

It will be a study of the gross income of corporations whose 
stocks are popularly known as "market leaders." The purpose 
is to show how the movements of these stocks are intimately 
related to fluctuations in that narrow slice of gross income known 
as the "balance available for dividends." 

The following eleven stocks during the year 1917 were 
traded into the extent of 80,000,000 shares. The transactions 
in them, in fact, comprised about four out of every ten shares 
bought and sold on the Exchange: 

Anaconda Oopper Alining Company 
Baldwin Locomoti\c Works 
Bethlehem Steel Corporation 
Central Leather Company 
Mexican Petroleum Company 
Republic Iron and Steel Company 
The Studebakcr (Corporation 
L'nited Fruit 
U. S. Rubber 
U. S. Steel 
Utah Copper 



44 Forces 

This list contains representives of the steels, motors, cop- 
pers, equipments, oils, and leathers. Hence in addition to its 
liigh turnover compared with the Exchange's total volume of 
business, it represents with fair accuracy Wall Street's diversified 
industrial interests. 

Let us now sketch the course of these eleven corporations' 
income from gross to dividends. We say sketch, because the 
•disposal of corporate income is to be considered fully in the 
texts studying The Financing of Enterprises, and our interest 
here is simply to get at market forces. 

Shares and Their Priority Claims 

These eleven companies in 1917 reported gross earnings of 
-over two billion five hundred million dollars ($2,500,000,000). 

Various persons lay claim to these gross earnings. Labor 
wants its pay envelope, the suppliers of raw materials submit 
their bills, and numerous other expense items must be satisfied. 
Most of the heavy demands of these persons and items are backed 
up by priorities, and very nearly 85 per cent of gross must be 
•disbursed to satisfy them. 

The bondholders comprise another group with a priority 
claim on gross income. Their claim — interest — is an impor- 
tant fixed charge against railway income, but, be it noted, in 
the case of those corporations here considered, interest removes 
but a narrow strip from gross income. Most industrial com- 
panies avoid issuing bonds, if possible. 

Next after the bond owners the preferred stockholders have 
a priority, although one less urgent in nature. Their slice 
equals 3 per cent, or more, of gross. 

The directors now, with approximately 88 per cent of the 
original gross no longer available for distribution, face the 
common stockholders. They do not vote the remaining 12 per 
cent of gross as common dividends, howe\-er. With conserva- 
tive intent, they set aside as "surplus" a fairly generous portion 
— and the thin stream of what still remains of gross dribbles 
into the common stockholder's purse. 



Fr om G r s s to Dividends 45 

The relative magnitude of dividends on common stocks as 
compared with wages and other prior claims against gross 
income is suggested in the table below: 

Distribution of Gross Income 



Wages and materials .... 
Allowance for depreciation 
Interest and pfd. dividends 
Improvements, etc., out of surplus 
Dividends on common stocks 



$2,000,000,000 80.0% 

125,000,000 5.0 

75,000,000 3.0 

200,000,000 8.0 

100,000,000 4.0 



Total gross income .... $2,500,000,000 100.0% 

Consider the corporation's gross income as flowing toward 
the common stockholder. Then note the process of distribu- 
tion, how the large proportion of the gross earnings consumed 
by expenses for wages and materials, and how small is the 
margin of dividends actually paid. 

Having presented the relation of gross to dividends in its 
general aspects, let us now study individual cases. 

Bethlehem Steel in 1918 had a gross income of $44S, ()()(), 000, 
yet the earnings on the common shares were only $11,000,000, 
or 2.5 per cent of gross, while the dividends actually paid to the 
common stockholders were only $4,458,000, or one per cent of 
gross. The United States Steel Corporation did a little better, 
showing earnings for Steel common equal to 6.42 per cent of 
gross, and dividends for the stock equivalent to 4.07 per cent 
of gross income. 

In view of the importance of the earnings of Slecl common 
to the man of independent judgment as a basis for his personal 
study of investment conditions, we are printing a table here 
showing a statistical history of the income and dividends on 
this stock since 1902. This table shows how the "balance for 
common" dropped from 554,000.000 in 1902 to $5,000,000 in 
1904; rose to $79,000,000 in 1907, only to fall to $20,000,000 
the next year; fell below zero in 1914, and rose to $246,000,000 
two years later. Then, most extraordinary of all, ii"'f 'In- 



46 



F r c e s 



rapid decline from 1916, to only $10,000,000 in 1921. Surely 
this is a feast and famine record which suggests that there will 
always be opportunities for profitable speculation in following 
the trend of the steel business. 

U. S. Steel (000 omitted) 





Gross Income 


Bal. for 


Com. 


Com. Div. Pd. 


Year 














Amt. 


% of Gross 


Amt. 


% of Gross 


1903 


$536,573 


$25,013 


4.66% 


$12,708 


2.36% 


1904 


444,405 


5,048 


1.12 


000 


.00 


1905 


585,332 


43,365 


7.35 


000 


.00 


1906 


696,757 


72,909 


10.47 


10,166 


1.46 


1907 


757,015 


79,346 


10.43 


10,166 


1.34 


1908 


482,308 


20,509 


4.25 


10,166 


2.11 


1909 


646,382 


53,854 


8.35 


20,332 


3.14 


1910 


703,961 


62,187 


8.80 


25,415 


3.60 


1911 


615,149 


30,080 


4.87 


25,415 


4.13 


1912 


745,506 


29,020 


3.89 


25,415 


3.40 


1913 


796,894 


55,997 


7.03 


25,415 


3.18 


1914 


558,415 


(Def.) 1,723 


—.30 


*15,249 


2.72 


1915 


726,684 


50,614 


6.96 


6,354 


0.86 


1916 


1,231,474 


246,312 


19.98 


44,476 


3.61 


1917 


1,683,963 


198,999 


11.81 


91,494 


5.43 


1918 


1,744,312 


112,312 


6.42 


71,162 


4.07 


1919 


1,448,557 


51,380 


3.54 


25,415 


1.75 


1920 


1,755,477 


83,842 


4.78 


25,415 


1.45 


1921 


986,750 


10,311 


1.04 


25,415 


2.57 


1922 


1,092,697 


13,514 


1.24 


25,415 


2.32 




$17,706,425 


81,283,961 


7.25% 
av. 


8490,511 


2.77% 
av. 



♦Paid out of surplus. 



Eliminating Bethlehem and U. S. Steel from the list of 
eleven companies grouped above, we find that the di\'idend& 
on the remaining nine will average about 5.5 per cent of gross 
and the total "balance for common" about 15 per cent. This 
is evidence that dividends average onlv one-third of the income 



1915 


1918 


$380,500,000 


$779,600,000 


55,250,000 


100,450,000 


17.1^:^ 


13% 


820,700,000 


$42,900,000 


5.4% 


5.5% 



F r m G r s s t D i V i d e n d s 47 

actually earned by common shares. Note this point in the 
following table: 

Earnings, Nine Companies 

Gross income 

Earned on common shares . 
Earned, per cent of gross 
Dividends paid on common shares. 
Dividends paid, per cent of gross . 

The important suggestions derived from a study of the 
above tables are: 

1. That dividends take a \er\' small proportion from the 

gross earnings of industrial enterprises, generally from 
3 to 5 per cent of gross income. 

2. That a very small increase in wages tends to wipe out 

dividends unless the gross income increases in pro- 
portion. And, 

3. That, conversely, dividends can easily double or treble 

with a very slight gain in gross income, if the outlay 
for wages and materials does not gain in proportion. 

Dividends VS. Earnings as a Market Guide 

We have stated that the amount of earnings put back into 
the property for improvements by most industrial companies 
is more than double the amount paid as dixidcnds. Stock- 
holders must sacrifice present enjoyment of income for the 
purpose of expanding operating facilities. The income to which 
they are actualK' entitled is largely paid to workmen employed 
in increasing equipment. On the average, industrial companies 
pay dixidends of SI. 00 out of every three earned by common 
shares, the other S2.00 being spent for betterments or put aside 
to swell "surplus." The stockholders, of course, retain owner- 
ship of the income put back in the property, and the jirice of 



48 Forces 

the stock usually reflects such investment in equipment. This 
is especially brought out by showing the fluctuations in the price 
of Steel common as compared with dividends and earnings per 
share. 

Whenever earnings are large, the stock rises in anticipation 
of heavy dividends. If the earnings double or treble, it is 
expected that dividends may double or treble, and the price of 
the stock leaps upward. But when the directors vote to appro- 
priate two-thirds of the earnings on the common stock to the 
improvement of plant, and distribute only one-third of the 
profits to the stockholders as dividends, the speculators are 
perplexed as to whether the stock should sell on the basis of 
book value of the plant, or in relation to the amount of cash 
dividends actually distributed. 

Investors know that an increase in profits means either 
larger dividends or an increased equity in the company's plant, 
and while the money market is calm, the stock rises. But when 
a panic comes and there is a premium on cash, investors begin 
to appraise property in terms of cash dividends, ignoring book 
values. The stock during a panic therefore falls to a close rela- 
tion with the cash dividends. The book value of "equity" in 
plant is largely ignored. After the panic has passed, however, 
it is once again recalled that large amounts of money have been 
invested in property, and the stock rises in anticipation of 
future earnings on this increased property. 

In the long run, the average price during a period of eight 
or ten \'ears bears a close relation to cash dividends paid. In 
the swings of the stock-market cycle, however, due considera- 
tion is given to the amount of earnings invested in capital equip- 
ment. Thus the stock market reflects a see-saw movement of 
prices, at one time rising in anticipation of the future income 
yield, but later falling to a level which gauges the actual cash 
dividends paid. 

Since the biggest possibilities in making money lie in buying 
during periods of depression and selling during periods of 
prosperity, it is more profitable to give greater attention to fluctu- 
ations in earnings on the stock than to the yield from actual 



From Gross to Dividends 



49 




dividends paid. This is demonstrated in the following chart, 
which shows how the price of Steel common has fluctuated with 
the percentage earned per share since 1902. Price movements, 
it is noted, precede dividend changes to a conspicuous extent. 

The question arises, 
how shall we forecast 
when the earnings are 
going to increase or de- 
crease? In answering 
this question there are 
two classes of factors to 
consider. First, the steel 
industr>''s internal ba- 
rometers, such as the 
"new orders booked" 
and the changes in the 
selling prices of steel 
products. Second, those 
fundamental factors 
which determine the big 
swings in orders and 

1902-1921. Key— Graph ".A."— Prices Steel Common. mCtal priCCS. 1 nCV are 
Grapli"B" — Earnings per share. Graph "C" — Dividends, piainlv CrOpS politics 

and money conditions. Just how these fundamental factors in- 
fluence the l)u>ing policy of consumers and the selling policy of 
the steel companies will be analyzed later in the text on 
"Business C\-cles." At this point we will merely exhibit a 
chart which affords graphic evidence of the close relation of 
''orders booked'' and money rates to the price of Steel common 
in the stock market. 

It will he noted that when unfilled orders increased in 1905, 
1909, 1912, and 1915, there was a rapid increase in the price of 
the stock. When the otlicials of the corporation and keen 
observers in Wall Street noticed that orders were falling off 
in 1907, 1910, 191.^ and 191S. however, the price rapidly 
fell. 



m \fA \r.o 



I?;? i?ii i?i3 1715 m w m Kj 
\m m m \% m m m 



Figure 7: Steel Common 

Quarterly dividends, earnings and price fluctuations. 



50 



Forces 



This close relation of orders to prices was continued after the 
armistice in November, 1918. For a few months orders were 
low and prices heavy, but when orders increased in the spring 
of 1918, investors again became confident and Steel common 
advanced. 



1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914' 1915 I91fe 1917 1918 1919 




1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 



2400 
2J300 
1600 
1200 
600 
400 




Figure 7: Stock Prices and Fundamentals 

The dose relation between money rates, orders booked by the Steel Corporation, and 
'the price of Steel common here is graphically presented. 



CHAPTER VI 
LOOKING AHEAD 

The Sinews of Wall Street 

What the sinews of Wall Street really are begins to become 
more clear. While board room "rust" often obscures these 
sinews and while under skilful camouflage effects frequently are 
mistaken for causes, the preceding study has revealed the under- 
lying forces in a way which will prove useful. This in itself 
represents no small achievement, since market perspective and 
a knowledge of the real price-making forces very often are not 
gained in several years' experience. Meanwhile, the would-be 
financier bumps along, with a few ups and many downs, wonder- 
ing why it is he does not strike things better. 

Winning golfers like Travers and champion sluggers like Ty 
Cobb state their rule of success in this way: Keep >'Our eye on 
the ball. This rule also has a fruitful application in Wall Street. 

Questions Which Point the Right Way 

The common stockholder, standing expectantly at (he end 
of the liiu', ui)()ii surveying the sources of his income ii.ituralK- 
feels concerned in the various intermediate steps of this process 
from gross to dividends. Those steps affect his money re- 
ceipts; hence in concentrating up^m tluin he practices the 
Travers-Cobb achice to keep his eye on the ball. 

These intermediate steps, since they comprise everything 
which has to do with tlu' iiicoiiK--])ro(lucing capacity of a stock 
and the rates for mone\-, are necessaril\- \aried in nature. The 
summaries in the preceding chajiter present the most important 
of I lu-ni : 

How are the crops? 
Are the factories busy? 



.52 Forces 

Do the mines operate at capacity? 
Are railroads well supplied with traffic? 

What is the value of exports? of imports? the excess of exports over 
imports? 

What is the attitude of labor? the extent of unemployment? the brand 
of philosophy preached by agitators? 

Are politicians favorable to business? What is doing in Congress, the 
State Legislature and the courts on economic matters? 

Are money rates high or low? What is the condition of the New 
York banks? of the London and continental money markets? 
Which way is gold moving, and in what volume? 

What in general is the condition of business? Is it good or bad? Are 
business men buoyant or depressed? Do they favor a policy of 
expansion or of curtailment? 

How is this particular corporation affected by the preceding condi- 
tions? What are its earnings, gross and net? How high are its 
fixed charges? its preferred dividends? When distributing surplus, 
are the directors conservative or prodigal? 

The common stockholder, therefore, as he stands at the end 
•of the Hne, has in addition to his expectancy an inquiring mind 
and numerous questions. 

The Profit Maker's Point of View 

A certain point of view upon this common stockholder's part 
is here so essential, yet so generally disregarded, that we preface 
our discussion of it with a little story of two big profit makers. 

In the days when Andrew Carnegie was still "King of the 
Steel Makers" his lieutenant was one Charles M. Schwab. 
Carrying out certain constructive notions which shaped them- 
selves in his mind, Schwab planned the Homestead Steel Works, 
to cost $10,000,000, an enormous undertaking for that period. 
The first that Carnegie heard of it was when he arrived in Pitts- 
burgh from Scotland one morning and Schw'ab laid the plans 
before him. 

"Charlie," he gasped, "where would we ever sell the entire 
•output of such a plant?" 

"Look here, Mr. Carnegie, at these statistics showing the 



Looking Ahead 53 



i» 



annual consumption of steel in this country, see in how few 
years the demand doubles." 

"Never in the world could we sell such an oul|)ut," responded 
Mr. Carnegie. "Charlie, put those plans right in your drawer 
and keep them there. Don't show them to anybod\-." 

The great general is first a great soldier, and Schwab was 
Carnegie's most loyal soldier. Without a word those plans 
were laid away and soon forgotten. Within two >'ears the cable 
came from Scotland: "I have borrowed the monc\- here. Build 
the Homestead." 

It took all the organization ability of Schwab to rush those 
works to completion in time to meet the rising American tlcmand 
for steel. In a few years the Homestead was but a small part 
of the Carnegie works, whose total annual net earnings were 
four times the construction cost of the Homestead. Today 
the entire Carnegie works arc but a minority in the United 
States Steel Corporation, while Schwab himself with char- 
acteristic vision has pushed Bethlehem Steel into a remarkable 
position second only to this great billion-dollar concern. 

Schwab and Carnegie looked ahead. Their plans were laid 
for future conditions and their rewards were due to foresight. 

"Keeping a little ahead of conditions," declares Schwab, 
"is one of the secrets of successful business; the trailer seklom 
goes very far." 

The Commercial and Financial Mainspring 

This incident of Carnegie and Schwai) introduces us to a 
matter of basic importance, whose e\er\-da>' realness is not 
usually appreciated. 

When a manufacturer conmiences to set the marki-tiug pi ice 
for his commodity, which cost to produce is fundamental — 
past cost, present cost, or costs which he aulicipatcs later will 
prevail? While it is true that in the case of staple articles 
which are continually being reproduced and whose costs do not 
vary a great deal from time to time, the figure o\'er which he 
ponders will be practicalK' the same if not identical with fxist 



54 F r ce s 

records, it is even in this case and markedly so in other cases a 
new figure, the cost expected to prevail in the future rather than 
the cost experienced in the past, which acts upon the manufac- 
turer as a controlling motive when he comes to set his selling 
price. The future is his real touchstone. 

Should he consider the securing of additional capital, its 
present value to him is the discounted value of the expected 
income — again a calculation based upon things anticipated. 

This principle, however, is widely applicable. Upon what 
does the value of all economic goods depend? Upon the satis- 
factions which they atTord, that is, the agreeable sensations 
derived from them or the disagreeable sensations which their 
use enables us to avoid. These satisfactions are matters of the 
future. In purchasing a pair of shoes, a house, a motor car or 
an aeroplane, we bank upon this future, with all its chances and 
risks; and the price now paid equals the discounted value of the 
article's expected benefits. These expectations may be sur- 
passed later when the commodity is consumed or the benefits 
possibly will fall short of the estimate, but in either case it is 
expectation and not realization which gives these economic goods 
their current value. 

Calculations of the future are the mainspring of commerce 
and finance, the real basis of everyday buying and selling. 



Jay Gould's Statement 

Finance is the most highly flexible and elastic portion of the 
whole production process, and with it calculations of the future 
have an unusual currency. Present worth of its wares, or 
securities, depend upon calculations of the benefits later to be 
derived in the form of interest pa^^ments and dividends; and 
calculations of the rate of interest by means of which these 
future values may be translated into present values through 
the process of discounting. Here, as elsewhere, the practical 
realness of the future again appears. 

The testimony of Jay Gould affords in this connection an 
interesting sidelight, in that it reveals the bent of the financier's 



Looking Ahead 5S 

mind. Mr. Gould was on the witness stand, under cross- 
examination concerning certain past events with respect to 
Union Pacific. 

"I consider the future of a road more important than its past." 

Q. "Yes, but what I want . . ." 

"The past was no criterion as to the Union Pacific Road." 

Q. "But don't you think that General Dodge and Mr. 
Humphreys . . . ?" 

"All my life," replied Mr. Gould, warming up, "all my life 
I have been dealing in railroads — that is, since I have been of 
age, and I have always considered their future and not their past. 

"That is the way I have made my money," he continued. 
"The ver>' first railroad I ever bought had a most deplorable 
past, but its future was fair. I paid ten cents on the dollar 
for its bonds, and finally sold the stock for $125. It was the 
future of the Union Pacific that drew me into it. I went into it 
to make money." 

The common stockholder, we may conclude, if he is to secure 
profits there at the end of the line from gross to dividends, con- 
cerns himself primarily with anticipated earnings of the cor- 
poration and anticipated money rates. With a fine disdain of 
the obvious, he mounts into some favored post of observation, 
armed with telescope, and faces fonvard. 

What's Ahead? 

Wall Street's leading money makers all keep an e>e upon 
coming events. When the outlook, as they see it, fa\ors a period 
of depression, they distribute stocks in anticipation of curtailed 
orders, factories running on half time, unemployment, poor 
earnings, and reduced dividends. When these latter conditions 
in due time become obvious, these same persons very likely are 
then accumulating stocks upon the prospect of business im- 
provement. 

Wall Street discounts coming events, and translates i(s forecasts 
of the future into actual concrete prices for securities. 



56 



F r c e s 



The "mystery" of why the stock market acts so and so, very 
commonly has here its explanation. The market moves upon 
prospects as far ahead as the best informed people can see, and 
its present prices are based upon estimates of future conditions. 




ticvP' 



lateA" 



,;V^^^*^ 



\pa' 



,tei' 



, M^*^^ 



VcvP^ 



ted' 



, .v»f^<^ 



\pate4* 



"Melons" 



Dividends 



"Lemons" 



/j{/c, 



'^afed. 



Unfilled Orders 
Net Earnings 
Manipulation 



Money Rates 
Tariffs 
Business Sentiment 
Crops 



Gross Earnings 



Mn 



f'c/pa 



fecf. 



Wages 
Business Failures 



'Ant, 



'"'Pat 



ed. 



Politics 
Strikes 
Wars 
■•^""■^'■Pated^ 



Taxes 



Figure 9: The Right Viewpoint 



The person who deals in securities raises continuously such questions as "Buy or sell, or 
hold my position? Which' stock?" Their correct answer calls for foresight, a looking ahead. 



A person cannot speculate upon the obvious. 

The so-called "insider" differs from the great majority of 
investors and traders in that he bases his commitments upon 
calculations of future economic conditions while the attention of 
the majority almost exclusively centers in prevailing conditions. 
"Why does the market not respond?" the outsider inquires in 
disgust when his stock sluggishly moves off the very day its 
statement of excellent earnings had appeared in all the news- 
papers. "It already has," thinks the insider; "what's ahead?" 

While all events cannot be discounted and many either are 
overdiscounted or underdiscounted (as will be considered later) 
the fact that in general, stock prices move ahead of present con- 
ditions and the certainty that they will discount everything 
obvious, is the most important, the simplest and the most 
disregarded of all speculative features. Riddance of this fault 
alone, under the methods outlined from Text to Text, will 



Look i n g A h c a d 5 7 

possess you of a changed viewpoint which not onl\- wins profits 
in Wall Street but an^'^vhere in business. 

The Next Step 

Future business conditions, in the form of items wiiich 
affect the income-producing capacity of corporations and the 
cost of money, bear upon present stock prices through the 
medium of minds engaged in the attempt to forecast. The 
beliefs of persons with funds and their hopes and fears con- 
cerning the future are in the end what rule upon the Exchange 
floor, and, since values wax and wane as these beliefs change, it 
is essential to know the methods with which Wall Street manipu- 
lators play upon the mind. 

The subject opened up in Text III, "Manipulation and 
Market Leadership," is a very interesting one; and our survey 
of forces which make the market cannot be at all complete 
until we have delved into it. 



Garden City Press, Inc. 
Neivton, Mass. 



TEST QUESTIONS 
"FORCES WHICH MAKE PRICES" 

The Test Questions which are unstarred can be answered 
directly from the Text discussion. Vou will lind them helpful 
for purposes of review. 

The questions which are starred call for original thought, 
the ability to apply the knowledge gained from the Text to the 
solution of new problems. 

1. What opportunies for profit does the stock market 
afford? Discuss the methods of a seasoned veteran outlined by 
Mr. Clews. 

*2. When inexpt-riencid and poorly informed persons were 
buying, as indicated on the chart. Page 11, WHO supplied the 
stocks? When they sold, WHO took over their stocks? What 
conclusion, which will increase your profits, do you draw from 
this? 

*3. Mention three specific errors revealed in the investi- 
gations made by Guyon and Gibson of brokerage accounts. 
How are you to avoid these errors? 

4. Into what three types can you classify market moves? 
What is Dow's Law? 

5. Describe what has been the course of the market during 
the past twenty years. Name specific forcc^ which ha\e operated 
to produce this course. 

*6. "The industrials have been booming. Isn't it about 
time for the rails to have their turn?" Note the diagram on 
Page 27. Do the rails necessarily mo\-e with the industrials? 

7. Sketch clearly the course of corporation's revenue from 
gross to dividends. Which of those who share this income 
have priority claims? 

*8. 'This discussion of inflation, exchange rates, crops, 
etc.," writes a subscriber, "which I read in the jjapers impresses 
me as a mass of generalities. Why does the editor not confine 
himself to individual stocks? That is his real business." Is 
it, or is it not? What conclusions upon this point do you draw 
from the chart on Page 49, for instance? 

*9. Do Stocks go up or down at the time of j^residential 
elections? During wars? 

10. "The annual statement issued, by the Steel Corporation 
seems to me to be most satisfactory. Why should the stock 
continue to sell off?" — L. D. H. How would you answer 
L. D. H.'s question? 



ANSWERS TO STARRED QUESTIONS 
"FORCES WHICH MAKE PRICES" 

*2. The experienced and better-informed. These are often referred to 
as "insiders" and professionals; and while they are not always right, they 
nevertheless secure very satisfactory results in general. 

The conclusion is: Reverse the methods followed by the public and thus 
act upon the methods of "insiders" and professionals. 

*3. Bought at the top. Sold at the bottom. Loaded more heavily at 
high prices than at low prices. 

*6. The industrials have been "booming" evidently because of their 
prosperity. And this increased business in turn calls for increased use of 
transportation, which normally is reflected in larger earnings and higher 
prices for rail securities. Moreover, for sentimental and other reasons within 
Wall Street, stocks often do move together. 

This common action does not always occur, however. The industrials, 
newly organized and their securities largely "undigested" made compara- 
tively little headway in 1900-1502, while the rails advanced sharply; and the 
rails, with their rates practically unchanged and operating costs mounting, 
advanced little in 1915-1916 while the industrials enjoyed an unusual bull 
move. 

The only sure way is to keep examining the forces which make prices. 

*8. These topics • — ■ inflation, exchange rates, crops, etc. — concern 
vitally business conditions as a whole, and hence the earnings of individual 
corporations. The charts on Pages 49-50 indicate that fundamentals and 
stock prices are closely correlated. Since the editor's real business is to 
present information which is helpful, he properly devotes considerable space 
to fundamentals. 

*9. These are old questions, which during every election and war are 
thrashed over in Wall Street. Elaborate deductions, often accompanied by 
numerous charts, are presented showing what the market has done, and 
hence what it should do this time. Considerable benefits can be derived 
from all this, provided conditions are similar. 

The war, a bull argument on industrials in 1916, turned into a bear 
argument in 1917, when the United States entered it. Whereas, orders were 
large in both cases, new factors, such as the excess profits tax, changed con- 
ditions decidedly. 



UNIVERSITY of CAUFOKWIa 

AT 

LOS ANGELES 

LIBRARY